Annuities

In its most basic form, an annuity is a contract between you and the insurance company in which the insurance company promises a series of payments to the owner or annuitant for a stipulated period of time (annuitization). It is a long term savings product backed by the claims paying ability of the insurance company. With some products, the payments can start immediately; with others, there may be a “waiting period” before payments may begin before the surrender charge period expires. 

Today’s annuities offer more than an income stream you cannot outlive. They also offer accessibility to your money and may offer benefits to help pay for long term care expenses, as well as offering death benefit options. All of this while being protected from stock market volatility (Fixed and Fixed Index annuities) and offering tax deferred growth. 

NOTE: all guarantees are backed by the claims paying ability of each individual insurance company. Surrender charges may be imposed should the annuity be liquidated before the surrender charge period expires or if more than the annual free withdrawal amount is taken before the surrender charge period expires. 

Fixed Annuities:

Fixed Annuities are issued by insurance companies which protect against loss and pay interest based on a fixed rate of return. The interest rate is typically based on current interest rates and is set for a number of years. After the initial interest rate period expires, a renewal rate may be offered or the client may exercise a “bailout provision”, if offered.  The growth is tax deferred until such time the owner starts withdrawals. Typically, there is an annual “free withdrawal” provision, which allows the owner to access a percentage of their money, free of surrender charges. After the surrender charge schedule has expired, the owner may have access to all of their money without surrender charges being imposed (see NOTE above). 

Fixed Index Annuities:

A Fixed Index Annuity is also issued by an insurance company. Like fixed annuities, they also protect against loss and can offer a fixed rate of return. However, they also offer the ability to generate interest by virtue of earning interest based on changes in a market index (ex: S&P 500), which measures how a particular index performs, usually over one year’s time. The interest is guaranteed never to be less than zero, even if the index goes down, which offers principal protection. 

Additionally, Fixed Index Annuities may also offer “Living Benefits”, which are guarantees issued by the insurance company to pay a stream of payments over a set period of time which cannot be outlived. Unlike annuitization, this feature has an “accumulation period”, where a separate account (aka, the “income account”) accumulates at a rate set by the company, regardless of whether or not there is actual gain credited to the contract by virtue of the index. After a minimum duration of accumulation, an income stream may be taken from the income account, usually guaranteed for the life of the owner/annuitant. Further, some companies offer an “enhanced income stream”, should the owner/annuitant fail 2 of 6 ADL’s (activities of daily living). This stream may be for a limited time or longer, depending on the company. Regardless, this benefit can prove to be quite valuable.

Immediate Annuities:

The most basic type of annuity, it involves a lump sum deposit to the insurance company in exchange for an ongoing, guaranteed stream of income for a specified period or life. Income can start almost immediately or within a year. Since part of the income stream is a return or principal, only the gain of each payment is taxable.